{"id":50832,"date":"2023-08-20T15:16:44","date_gmt":"2023-08-20T19:16:44","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/is-the-u-s-economy-really-growing-by-5-8-not-so-fast\/"},"modified":"2023-08-20T15:16:47","modified_gmt":"2023-08-20T19:16:47","slug":"is-the-u-s-economy-really-growing-by-5-8-not-so-fast","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=50832","title":{"rendered":"Is the U.S. Economy Really Growing by 5.8%? Not So Fast."},"content":{"rendered":"
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Based on the latest economic forecast from the Federal Reserve Bank of Atlanta, the U.S. economy is moving from red-hot to boiling \u2014 a worrisome development for the Federal Reserve, and anyone else hoping interest rates won\u2019t rise.<\/p>\n

But don\u2019t panic yet: The Atlanta Fed\u2019s GDPNow model estimate for real growth in gross domestic product for the third quarter, which was revised upward Wednesday to 5.8% from the prior week\u2019s 5.0%, isn\u2019t an official forecast. It isn\u2019t even forward-looking, but based on \u201cavailable economic data for the current measured quarter.\u201d And it is likely to be revised lower \u2014 perhaps much lower \u2014 as the third quarter unfolds.<\/p>\n

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Maybe the band Guns N\u2019 Roses said it best: \u201cAll we need is just a little patience.\u201d\u00a0<\/p>\n

The latest reading followed the release of data on July housing starts, which jumped 6.7% month to month, and reports showing industrial production rose sharply last month. The strong housing data, in particular, helped spur the GDPNow revision, as residential investment\u2019s contribution to the model jumped from -0.2% to +0.42%.\u00a0<\/p>\n

On the surface, the latest GDPNow reading seems like bad news for the Fed, which has been attempting to cool the economy via aggressive interest-rate hikes to bring down inflation. The current federal funds rate target range is 5.25% to 5.5%, the highest in 22 years.\u00a0<\/p>\n

\u201cRecent third-quarter GDP estimates, coupled with fresh retail sales data, suggest a much more robust underpinning to the economy, certainly not what the Fed wants to see as they navigate the so-called \u2018last mile\u2019 toward achieving price stability,\u201d Quincy Krosby, chief global strategist for LPL Financial, wrote recently.<\/p>\n

If the latest GDPNow rate holds \u2014 the seasonally adjusted annualized rate was just 4.1% two weeks ago \u2014 it would be the fastest growth rate since 2003, Schwab\u2019s chief investment strategist, Liz Ann Sonders, points out<\/a>.\u00a0<\/p>\n

But there is little chance it will hold.<\/p>\n

The GDPNow model is based strictly on data that have already been released, Mike Skordeles, head of U.S. Economics at Truist Advisory Services, tells Barron\u2019s<\/em>. Not all the July data have been published yet, let alone economic readings for August and September.<\/p>\n

\u201cAs that data comes in\u2014just as we\u2019ve seen with some of these numbers, particularly the housing starts and production in the past couple of days\u2014it pushes that [GDP] number around a lot,\u201d Skordeles says. \u201cThat\u2019s especially true so early in the quarter, because there\u2019s no other, monthly third-quarter data yet.\u201d\u00a0<\/p>\n

There is also a good chance that at least some of the July data releases feeding into GDPNow will be revised lower. The Bureau of Labor Statistics, for instance, has made sharp downward revisions to payroll growth for May and June, and could revise July\u2019s job count when it reports August data.<\/p>\n

While the GDPNow model reflects strength in the July data for retail sales, auto sales, housing starts, and industrial production, Skordeles says most of that resilience was more \u201cone-off\u201d than reflective of a lasting trend. The strength projected by the July reports also got a boost from double-counting a few items, notably, autos and residential construction data that show up in several agency reports.\u00a0<\/p>\n

While new-home construction was strong in July, new building permits\u2014generally seen as a leading indicator\u2014aren\u2019t currently factored into the GDPNow estimate, Skordeles notes. Permits have been running 13% below 2022 levels. Moreover, the July housing data don\u2019t yet reflect the mortgage-related fallout from the most recent rise in interest rates. Average 30-year mortgage rates rose to historic highs this past week. Given these factors, housing overall is looking weaker heading into the end of the year, Skordeles says.\u00a0<\/p>\n

\u201cThe economy is definitely slowing down,\u201d Skordeles says, adding that while he doesn\u2019t anticipate a sudden collapse in economic activity, he hasn\u2019t abandoned his forecast that the U.S. will experience a shallow recession.\u00a0\u00a0<\/p>\n

Economist Jason Furman noted<\/a> in a post on X, formerly known as Twitter, that at this point in any given quarter, the GDPNow model forecasts typically are biased upward by about one percentage point. Excluding 2020 estimates, he wrote, the forecasts at this stage have a standard deviation of about 1.5 percentage points.\u00a0<\/p>\n

The model\u2019s biggest miss, excluding 2020, was on Aug. 17, 2021. The GDPNow estimate was 6.2%, and the government\u2019s advance estimate for GDP came in at 2.0%, Furman said.\u00a0<\/p>\n

The markets seem to have shrugged off the latest GDPNow estimate. On Friday, the odds that the Fed will keep the federal funds rate unchanged in September were at 90.5%, according to the CME FedWatch Tool, which tracks moves in interest-rate futures. And that was slightly higher than Wednesday\u2019s reading.\u00a0<\/p>\n

So, yes, be patient. What the current GDPNow estimate signals to investors and markets is that the U.S. economy is nowhere near a recession. But there are still 43 days left in the third quarter, and several important economic reports have yet to be released. By mid-September, the view from Atlanta could look different.\u00a0<\/p>\n

Write to Megan Leonhardt at megan.leonhardt@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n